R EFERENCE MODEL OF MANUFACTURING ORGANISATIONS

This section is about the definition of terms used in this chapter. The model presented is about organisations that pursue making a profit. To accomplish this goal, these organisations can make use of input resources (e.g., equipment, human, and material) to obtain output resources (e.g., products, and services), which are sold to customers. As such the model is applicable for organisations producing standardised goods in predefined processes. In the model, an organisation is thus considered as a group of resources fitted together to make profit. If not created by the organisation itself resources are obtained from the procurement market in supply-contracts against payment. If not kept in the organisation the output resources are sold in demand-contracts to the sales market also against payment. As a result of this interaction between the organisation and the markets there is a resource flow and an operating cash flow. This thesis only refers to this cash flow and not to the financing cash flow that the organisation may have with financial markets. Financing cash flows are to attract, repay, invest or de-invest funds, and to pay or receive interest and dividends. The different resource flows and cash flows are depicted in Figure 3-1. The modelling of resources flows and cash flows resembles the registration method of (financial) transactions in the Variability Accounting concept as described by Israelsen (1994).

In the subsequent sections, we argue that we use cash flows to evaluate the impact of a decision-alternative. The impact of the type of decisions that are discerned, short-term and medium-term decisions, is the totals of relevant incoming and outgoing cash flows as a result of the decision-alternative. That total may consists of separate payments, but we use the words ‘cash flow’ for the total cash flow, the sum of the separate payments. For instance, suppose that due to a decision-alternative we have to buy some raw material that amounts 1,000 EURO, and this purchase transaction results in two payments. The first amount, a prepayment of 250 EURO, is due 10 days after placing the purchase order; the remaining amount, 750 EURO, is due 30 days after receiving the raw material (together

Generic accounting model to support operations management decisions 51 with the invoice). The term ‘cash flow’ as we use it refers to the total cash flow of the transaction, in this case 1,000 EURO.7,8.

Organisation Procurement market

Financial market

Sales market

operating cash flow resource flow

financing cash flow

Figure 3-1: Cash flow model

A resource is defined as ‘an object that is scarce and has utility and is under control of an enterprise’ (Ijiri 1975, 51 – 52). Resources are objects which are used by, or which are the outcome of the creation function of an organisation. A resource is counted by means of its quantifier9. Of course, the quantifier of each resource has an unit of measure (pieces, hours, kilograms, etc.).

The quantifier of a resource can be altered 1) when resources enter or leave the organisation, or 2) when resources are consumed or created by the creation function of the organisation. The first possibility – a resource entering or leaving the organisation –

7

In the accounting literature the terms cost of acquisition and revenue might be used to indicate these total cash flows.

8

In Chapter 4 when we model accounting data, we only record the separate (planned and actual) payments. The reason for this is that the total cash flow resulting from a resource transition can easily be derived from the separate payments. Moreover, insight in the separate payments might be needed for other accounting purposes (see also the requirement ‘objectivity of accounting data’ of Chapter 2).

9

For ease of reading we will use the term ‘resource’ as much as possible instead of the term ‘the quantifier of a resource’.

52 Chapter 3 requires a contract. A contract is defined as ‘an agreement between the organisation and a partner in a specific market, in which the conditions regarding the transition of a resource are specified’. A contract does not need to be an explicitly written agreement. The minimum requirement that is posed to a contract is that a supplier and a buyer have agreed that the supplier supplies specific resources and the buyer pays a specific amount of money for those. When a contract refers to an incoming resource flow from the procurement market, the contract is called a supply contract. When a contract refers to an outgoing resource flow to the sales market, the contract is called a demand contract. The dual relationship in each contract between the organisation and a partner is called a give – take relationship (similar to Geerts and McCarthy 1997) 10. The give-relationship refers to the outgoing flow; the take-relationship refers to the incoming flow. There are several conditions regarding a contract. One condition is particularly relevant and mentioned here: the financial condition. This condition is specified by:

❑ Start-up period. ❑ Termination period. ❑ Economic commitment.

The start-up period is defined as ‘the time interval needed between the construction of the contract and the completion of the resource transition’. The termination period is defined as ‘the time period needed to end the contract’. The termination period can be instantiated as a minimum contract period, a variable period dependent on the contract period already elapsed, or just a fixed period. Figure 3-2 gives a graphical representation of these contract characteristics. Economic commitment is defined as ‘the total cash flow concerned with the resource transition’.

The creation function of the organisation provides the second possibility to alter the quantifier of resources. The creation function is defined as ‘a set of activities’. An activity specifies the required quantities of input resources and the resulting output resources. As such an activity is responsible for resource consumption and resource creation. Consumption refers to the process of the decrease of the quantifier of a resource; creation refers to the process of the increase of the quantifier of a resource. The relationship of each activity with input and output resources is a specific form of a give – take relationship: namely an input – output relationship. The input-relationship refers to the resources that

10

Generic accounting model to support operations management decisions 53 are used by the activity; the output-relationship refers to the resources that are created by the activity.

Start date

Agreement date Termination date

Termination period Start-up period

Contract period

t

Figure 3-2: The contract parameters

(Theeuwes and Adriaansen 1994; Corbey and Tullemans 1991)

We discern contracts and contract potentials. Contracts are agreements between the organisation and its suppliers / customers regarding resource transitions and the cash transitions. Contracts can be final or planned. Final contracts refer to committed agreements with the external partners. Planned contracts are forecasted contracts based on a forecasted demand. Contract potentials are agreements about possible (future) resource transitions and the cash transitions. The same distinction is made for activities and recipes. A recipe is a specification of a possible (future) activity. Figure 3-3 gives a graphical representation of the different types of contracts and activities.

Contract Contract potential Final Planned Recipe Activity Final Planned

Figure 3-3: Overview contract / activity types

A planned demand contract becomes final when forecasted demand, that is represented in this contract, is realised. Or in other words, the demand contract becomes final when a customer commits itself and the organisation to the sales transaction. Planned supply contracts or planned activities only become final when the moment to execute cannot be

54 Chapter 3 postponed anymore (e.g., due to lead-times). An example of this latter situation is the ordering of materials to be used for production in the next period, which cannot be postponed anymore due to the delivery time of the materials.

External demand for resources is modelled in the give-relationship of the demand contracts. Internal demand is modelled in the input-relationship of the activities. Each type of demand for these resources can be satisfied or supplied by 1) the output-relationship of activities or 2) the take-relationship of supply contracts. The difference over time between the demand and the supply of a resource is called stock. Figure 3-4 gives a graphical representation of the information model of the process model. The dashed arrows point to the part of the resource flow that is specified in the specific contracts or activities. For example, the resources purchased are specified in the take-relationship of a supply contract. The customer demand for a number of that same resource is specified in the give- relationship of the demand contract. The difference in quantities (supply is greater than demand) is expressed in the figure by means of the stock symbol.

Customer Demand contract Activity Supply contract Give relationship Output relationship Take relationship Input relationship Resource flow P rocess m o del In form a ti on m o d el Supplier Activity

Generic accounting model to support operations management decisions 55 Processes in the organisation can be controlled by means of plans. A plan concerns a set of contracts to acquire / sell resources and activities to consume / create resources, and a plan directs the organisation to specific goals. The complexity of controlling manufacturing processes is reduced by introducing concepts of hierarchical planning. In hierarchical planning higher level plans set constraint for lower levels. The hierarchical level is determined here by the level of aggregation. Aggregation is defined as ‘replacing multiple, separate elements in one combining element’ (Giesberts 1993). Examples of elements that can be aggregated are:

❑ Resources (into family resources). ❑ Customers (into customer groups). ❑ Geographical areas (into regions). ❑ Time moment (into periods).

For example, 1) the master schedule is based on family items and family work centres whereas order acceptance is based on real items, or 2) sales plans are based on sales regions whereas the order acceptance is based on individual orders of actual customers in a specific location. Planning thus means making plans. These plans are made, based on new information with the older plans (if any) as a reference point. This means that planning could vary from executing previous contracts / activities as pre-planned, to specifying older aggregated plans into more detailed plans, to introducing new contracts / activities when cancelling the pre-planned contracts / activities. Specific examples could be: accepting orders for a sales item as foreseen, specifying the manufacture of specific quantities of individual products, completely according to the plans for the family item, or introducing a new forecast and at the same time cancel the old plan.

The plans are used to specify the planned use of resources. Information about planned use is used in the model to determine opportunity costs. The planned use is expressed by means of the reservation of a resource. The reservation is for a particular ‘destination’, and can be ‘planned’ or ‘final’. This latter is denoted as the status of the reservation. Destination indicates for which selling or consumption purpose the resources are planned to be used. Status specifies whether or not the destination of the resources can be changed in the planning processes. The status planned means that the destination, if there is any, may be changed. The status final means that the destination of a resource cannot be changed. The status becomes final, when the destination is a final demand contract / activity and when replenishment is not possible because of lead-time restrictions or scarcity of the resource.

56 Chapter 3